TOKYO, Jan 24 (Reuters) - Japan’s top two steelmakers, including world No. 2 Nippon Steel Corp (5401.T), may report small profit gains for October-December thanks to price increases, and solid demand is likely to keep boosting their earnings in the year from April.

China’s Baosteel Group Inc., on the other hand, may have suffered from sluggish sales of stainless steel, one of its major earnings drivers, while possible export tariff hikes and a slowing global economy may bode ill for 2008.

Most analysts expect steelmakers will be able to pass on higher costs to end users given the tight market conditions, but doubts remain over whether they can do this fast enough to cover their own cost increases.

Still, despite uncertainties about the U.S. economy and the prospect of surges in raw material costs, analysts expect demand for steel to keep supporting Japan’s top steelmakers, whose top customers include automakers such as Toyota Motor Corp (7203.T).

They add that tight supplies of high-grade sheet steel and thick plates have enabled Japanese makers to raise prices and output, helping them absorb high raw material, freight and other costs as well as falling sales of stainless steel products.

“Nippon Steel and JFE’s output and profit in the nine months to December could have slightly exceeded their plans,” said Shinya Yamada, an analyst at Credit Suisse. “They are on a steady track to hit profit targets.”

Nippon Steel is heading for a fourth straight year of record profits in the 12 months to the end of March. JFE Holdings Inc (5411.T), the world’s third-biggest steelmaker, is also seen ringing up a record profit this business year.

According to a poll of three analysts by Reuters Estimates, Nippon Steel’s net profit in the October-March period is likely to reach 197 billion yen ($1.85 billion), up 5.2 percent.

JFE’s six-month profit could rise 4.3 percent to 172 billion yen, according to a survey of four analysts.

Baoshan Iron and Steel Co (600019.SS), the listed unit of Baosteel, is likely to have been hurt by the falloff in the stainless market after a plunge in nickel prices, and its profit may have been halved in 2007.

Baosteel is expected to post a 9.7 percent fall in net profit to 3.54 billion yuan ($489 million) for the three months to December, based on the estimates of five analysts polled by Reuters. Forecasts for the October-March period were not available.

Japanese steelmakers rely for the bulk of their business on stable but thin-margin contract sales of high-grade steel, while South Korean and Chinese rivals depend more on the volatile spot market for commodity grade steel.

SHARES SLUMP

In spite of their solid earnings, shares in Nippon Steel and JFE fell 28 percent and 36 percent, respectively, by the end of December from their year-highs hit in July.

The two were dragged down by concerns that the fallout from the U.S. subprime mortgage market woes could spread to developing markets, in which the two firms are getting more involved. “Japanese steelmakers’ stock performance does not reflect their fundamentals. It means money flew into China, not Japan,” said Masaru Okawa, an analyst at Nomura Securities.

Baoshan’s stock soared 44 percent during the same period.

Analysts polled by Reuters said Baosteel’s per-tonne production costs of crude steel could increase by about 300 yuan if the contract price of iron ore rises 50 percent.

“Possible further export tariff increases and a slowdown in the global economy could hurt Baosteel’s exporting business in 2008, while rising raw materials prices should add to its production costs,” said an analyst with a Shanghai-based asset management house who declined to be identified.

Japan’s Sumitomo Metal Industries Ltd 5405.T is expected to report a flat to lower quarterly profit, hurt by a temporary gain in the value of nickel stocks last year. Kobe Steel Ltd (5406.T) will likely suffer a profit decline due to the high value of copper stocks last year and poor electronics parts sales.